Munich Personal RePEc Archive The Preeminence of Gold and Silver as Shariah Money Krichene, Noureddine and Ghassan, Hassan B. Umm Al-Qura University, IMF 2017 Online at https://mpra.ub.uni-muenchen.de/95445/ MPRA Paper No. 95445, posted 07 Aug 2019 03:57 UTC The Preeminence of Gold and Silver as Shariah Money Noureddine Krichene1 and Hassan Ghassan2 Published in Thunderbird International Business Review volume 61:821-835, 2019 Abstract Shariah money is gold and silver, supplied by the market on profit criterion. Everywhere, government inconvertible paper money arose from bankruptcy. A government with balanced budgets would never need it. Imposed by force, inconvertible paper is a taxation mean, highly inflationary, and causes impoverishment. Unjust and bankrupt governments will continue to force this despotic money. Islamic Monetary Economics refutes the idea of money as a policy tool. Fully convertible paper is Shariah compliant. Shariah requires a just government to balance its budgets and restore fully gold and silver as lawful money. Key words. Shariah, money, gold-silver, inconvertible paper, inflation, bankruptcy. JEL Classification. E42, E5, F33 1 Professor Noureddine Krichene is an economist, previously affiliated to the International Monetary Fund, and former advisor at the Islamic Development Bank, Jeddah: [email protected] 2 Professor Hassan Ghassan (Corresponding author) is an economist at the University of Umm Al-Qura, Department of economics, Makkah: [email protected] 1 1. Introduction Money is defined as the cash in circulation; it is perfectly liquid, unanimously accepted in all transactions. Previously, it included gold and silver coins. Presently, it is government currency. Money substitutes may be less liquid. They include credit, and bills of exchanges and commercial effects that are allowed by law to circulate through endorsement. Money was invented to circumvent barter trade and promote commerce and the specialization and division of labor within and across countries. Without money, any economy, regardless how advanced it be, will collapse into starvation and social disorder.3 Throughout the centuries, governments have often debased money, a practice that dated back to the Roman Empire. By outlawing gold and forcing inconvertible paper money, governments have often resorted to excessive money printing, causing high price inflation. Oresme (14th century) and Copernicus (1526) opposed money debasement as it inflicted damage to trade and property. Shariah has set out divine rulings to preserve a sound money. It bans strictly interest transactions. Consequently, it bans interest-based debt money which displaced gold and silver (Gouge 1833, Carroll 1850). Shariah recognizes money as a commodity, an equivalent in labor and capital content to another commodity in exchange, which enters the circulation, as any other commodity, via production and exchange. Its price in relation to other commodities obeys strictly the laws of supply and demand. Likewise, the US Constitution was explicit that gold and silver were money.4 Shariah bans inconvertible paper money; it recognizes no privilege for the government to emit non- commodity money such as fiat money; nor does it recognize the right acquired by any bank through legislation to emit debt money.5 For many centuries, only gold and silver were used as money in the Islamic countries (Ibn Khaldun 1377, see later Section 7). Also, Ron (2011, page 6) stated on the bezant i.e. byzantine gold coin that “For ten centuries the byzantine coins were accepted all over the world, ... The Byzantine empire declined when it debased the bezant.” After several centuries, paper money made its debut in the mid-19th century with the Ottoman empire. Pamuk (2000) indicates that from 19th century the Ottoman government first adopted bimetallism and moved towards the monetary gold standard system, among other governments around the world. The Islamic Ottoman empire issued in 1863 paper money 3 Starvation became widespread during the German hyperinflation (Bresciani-Turroni, 1931). Starvation occurred also in France during the assignat hyperinflation. 4 Article 1, Section 8 of the Constitution: (i) the Congress shall have the power: to borrow money on the credit of the United States; (ii) to coin money, regulate the value thereof, and of foreign coin, and fix the standards of weights and measures; (iii) to provide for the punishment of counterfeiting of securities and current coin of the United States. 5 Inconvertible paper is not money as much as a horse in paper is not a horse and a house in paper is not a house. Government power cannot alter the nature of money as a traded commodity in as much as it cannot turn a horse in image into a true horse. 2 convertible to gold, the monetary authority named the Imperial Ottoman Bank was granted issuing gold- backed banknotes and then guaranteed their convertibility (Pamuk, 2000; Tuncer, 2012).6 The various opinions of scholars, discussing the Shariah-compliance of the paper money, depend on the historical circumstances and on their interpretation based on the Quran and authentic Sunnah. The first Islamic jurisprudence viewpoint considers that the paper money is Shariah compliant since its convertibility is approved by the monetary authority. The second viewpoint considers it as debt on the issuing bank i.e. central bank, and then it is illegal for selling or purchasing. The third viewpoint perceives the paper money as a weak substitute, adopted by the monetary authority, because it has virtually no commodity value. The fourth viewpoint conceives it as trade item but cannot be joined to the six tangible items cited in the Prophet Hadeeth narrated Ubida Ibn al-Samit because such special class of item differs from the other trade commodities. According to Muslim ibn al-Hajjaj (817-875, page 306), Ubida Ibn al-Samit narrated the authentic Hadeeth (sayings) of the Prophet Mohammed (peace be upon Him) “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand. But if these commodities differ, then sell as you like, as long as it is hand to hand.”. Also, according to Imam Bukhari (810-870, page 490), Ibn Shihab narrated the authentic hadeeth of the Prophet Mohammed (peace be upon Him) “. The selling of gold for gold is Riba (usury) except if the exchange is from hand to hand and equal in amount, and similarly, the selling of wheat for wheat is Riba (usury) unless it is from hand to hand and equal in amount, and the selling of barley for barley is usury unless it is from hand to hand and equal in amount, and dates for dates, is usury unless it is from hand to hand and equal in amount.” These two authentic Hadeeths indicate which dealing should be prohibited to protect the people’s rights and that the focus point in all transactions is to forbid the Riba including the banking interest rate (Iqbal, 2003; Hassan and Lewis, 2007).7 At that time, such items represented the necessities of the people and served to define prices in the market of the settled transactions. Based on the Hadeeth narrated by Ibn Shihab, Abdul-Rahman (2010, page 107) shows that there are two conditions to not fall in the prohibition when making a transaction between two items from the same material: c1) the quantity on both buying and 6 Under the inconvertible paper money system, the issuing authority does not authorize to convert the fiat money, i.e. currency note ordered by the government, into gold or other precious metals coins. In an Islamic perspective, even if the paper (fiat) money is convertible, it should be implemented in a Riba-free based financial system. But nowadays and since the colonization period, the Muslim people went out of the pathway of their Islamic monetary system. 7 Concerning the Riba and interest concepts, there is a consensus that Riba concept is not restrictive as the interest concept. Because, the Riba can appear in any unfair transaction, but the rental price called interest rate on loans is involved specifically by financial transactions of banks (Algaoud and Lewis, Chapter 3 in Hassan and Lewis, 2007; Iqbal, 2003). Both Riba and interest rate as a renting money lead to the concentration of wealth and then to economic and social inequalities (Al-Suwailem, 2000). Obviously, the bank interest is a type of Riba, and for the monetary purpose the interest is equivalent to Riba. Nevertheless, it is more accurate to use Riba-Free financial system than Interest-Free financial system (Abdul-Rahman, 2010, Chapter 2). 3 selling sides should be identical, regardless of the quality; c2) the buying and selling must be done on the spot i.e. hand to hand. He shows that, to avoid Gharar (Al-Suwailem, 2000),8 Shariah requires that commodities must be priced (in the market) in terms of another reference commodity (generally gold and silver money) before being traded for a higher quantity, volume, or weight of the same type of commodity (Abdul-Rahman, 2010, page 108). Muslims continued for centuries to apply such rulings in their commercial and transaction dealings. Furthermore, from the Hadeeth narrated by Ubida Ibn al-Samit, we understand that if one excludes the gold or silver money in his/her transaction, he/she must implement the transaction or trading through strictly equal weighted-quantity and on the spot. Then, the Prophet Mohammad (peace be upon Him) institutionalized that the best manner to operate fair trading in the markets is through gold and silver money i.e. real money. Also, if this rule is transgressed the economy will face unreal prices. Shariah strictly forbids altering the standard of measure be it meter, ton, or liter. Once the standard of value has been defined in terms of weight and fineness, it should become immutable (Locke, 1691; Liverpool, 1805).